Taiwan financial services

US dollar gains back ground against Taiwan currency

The New Taiwan dollar traded above NT$29.80:US$1 on May 14th. It had also done so on several occasions since May 2nd, prior to which it had not traded above this value since December 2017.

Analysis

We view the steady depreciation in the value of the New Taiwan dollar against the US dollar since the beginning of April as the start of a downward trend for the local currency this year. This is primarily owing to a strong US dollar, however, rather than weakness in the local currency. Indeed, the New Taiwan dollar has gained ground against the euro since late April, and has remained relatively stable against the yen since late 2016. Although the local currency has depreciated against the renminbi since mid‑2017, it has done so at a more moderate rate than against the US dollar.

In 2017 the New Taiwan dollar was one of the strongest-performing emerging-market currencies against the US dollar. This was partly owing to improving investor sentiment towards Taiwan's economy, as reflected in strong capital inflows and buoyancy in the local bourse. Meanwhile, on the trade side, merchandise exports performed strongly in 2017 amid resurgent external demand in important foreign markets—including the US—and low commodity prices helped to reduce the import bill, easing downward pressures on the currency. This trend stalled from February as the US dollar strengthened on the back of brighter domestic economic prospects and ongoing monetary policy tightening by the US Federal Reserve.

We expect the New Taiwan dollar to continue to trend lower against the US dollar in the second half of 2018, on largely the same basis. This trend will continue into 2019 despite relatively robust economic fundamentals in Taiwan. Nonetheless, the Central Bank of the Republic of China (Taiwan), or CBC, will welcome the currency's depreciation. Although the CBC held off on currency-market intervention in 2017 and early 2018, possibly out of fear of stoking political tensions with the US, it is likely to be concerned about the declining competitiveness of Taiwan's exports, particularly as external demand moderates later this year.

Impact on the forecast

No change to our forecast is required. The latest data are in line with our expectation for the New Taiwan dollar to trend down in value against the US dollar in the remainder of 2018. Nonetheless, it will average higher in 2018 as a whole, at NT$30.12:US$1, compared with NT$30.44:US$1 in 2017, owing to its strong performance in early 2018.